Mel Watt: Whether GSEs Should Use Alternative Credit Scoring Models is ‘Tough Decision’


Whether government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac should pave the way for the use of alternative credit scoring models in the underwriting of mortgage loans is a tough call, Mel Watt, director of the Federal Housing Finance Agency (FHFA), said during the Mortgage Bankers Association’s Annual Convention and Expo in Denver on Monday.

The GSEs have been exploring the use of alternative credit scoring models as a means to give more self-employed or “credit invisible” consumers access to mortgage loans. This can include consumers who have income from nontraditional sources or who hold significant assets but are not traditional W-2 wage earners.

As the FHFA and the GSEs are exploring this option, a bill recently introduced in the Senate would actually require the GSEs to use alternative credit scoring models. Co-sponsored by Sens. Tim Scott, R-S.C., and Mark Warner, D-Va., the bill, if approved, would direct the companies to develop underwriting processes that would allow them to consider credit scores other than the traditional FICO, such as the VantageScore or FICO Score XD.

In his speech on Monday, Watt said “none of the decisions we make at FHFA are easy decisions – and taking into account multiple perspectives, as we always try to do, often makes decisions even more complicated and difficult to reach.”

“One example of this is the challenge we have encountered in reaching a decision about whether to require the Enterprises to use alternative credit scores,” he said. “I initially thought this decision would be relatively easy to make. After all, we all believe that competition is good, don’t we? However, the more we looked into this issue, the more complicated it became and it is turning out to be among the most complicated decisions I have faced during my tenure at FHFA.

“To fully analyze whether we should require the enterprises to update their credit score model requirements – including possibilities that would involve using more than one credit score provider – we’ve had to look at the issue from multiple angles,” Watt said. “For example, do alternative credit scoring models actually increase access to credit by providing credit scores on more borrowers who are credit worthy and able to pay a mortgage? How does this compare with the enterprises’ current ability to evaluate borrowers without a credit score? How do we ensure that competing credit scores lead to improvements in accuracy of credit decisions and not just to a race to the bottom with competitors competing for more and more customers?  What would be the implementation and operational costs to the enterprises, lenders, and other industry participants of converting to an alternative credit score or a multiple-score system? Does the credit repositories ownership of one of the credit score providers present implications for long-term competition in the credit scoring market?”

Watt said in light of these complicated questions, the FHFA will be soliciting industry feedback this fall, with an aim toward “making a decision about the enterprises’ future credit score model requirements in 2018.”

Any changes coming about as a result of that feedback would take effect “no earlier than the second half of 2019,” Watt added.

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